Whitney Tilson’s email to investors discussing Warren Buffett buys gold, sells financials; Former Hertz CEO gets a slap on the wrist; The Psychology of Money; Chapter from my book on behavioral finance.
Q2 2020 hedge fund letters, conferences and more
Buffett Buys Gold And Sells Financials
1) In its quarterly 13-F filing on Friday, Berkshire Hathaway (BRK-B) disclosed some interesting buys and sells in its stock portfolio.
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Perhaps most surprising was a new stake in gold mining giant Barrick Gold (ABX.TO) given that CEO Warren Buffett has long heaped scorn on the investment merits of the precious metal. For example, in his 2011 annual letter, he wrote:
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 ExxonMobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Does Buffett’s new investment in gold, which is typically an asset investors flee to when they are most fearful, indicate that Buffett is super-bearish?
Perhaps… but I hesitate to read too much into it. This is a microscopic position, worth only $625 million (including this morning’s pop) – a mere 0.23% of Berkshire’s stock portfolio. So my guess is that one of Berkshire’s other investment managers, Todd Combs or Ted Weschler, is responsible for buying Barrick Gold.
Far more significant were Buffett’s decisions (and they were surely his) to sell more than $7 billion of bank stocks. Specifically, he sold 26% of longtime holding Wells Fargo (WFC), 62% of JPMorgan Chase (JPM), his small remaining stake in Goldman Sachs (GS), as well as shares of Bank of New York Mellon (BK), M&T Bank (MTB), U.S. Bancorp (USB), and PNC Financial (PNC).
I do think this reflects Buffett’s cautiousness about the current state – and future prospects – of the U.S. economy. But, again, I wouldn’t read too much into it.
First, Berkshire’s portfolio was seriously overweight financials. Including American Express (AXP), the sector accounted for roughly 25% of Berkshire’s $270 billion stock portfolio before the recent sales, far above the 10% weighing in the S&P 500 Index (not that Buffett cares one iota about tracking any index!). And this was hardly a fire sale – rather, it was some light trimming, equal to only a bit more than 10% of Berkshire’s total exposure to financial stocks.
Second, trimming Well Fargo was probably due to company-specific issues. As my friend Doug Kass of Seabreeze Partners wrote this morning:
I am a bit surprised about his large sale of Wells Fargo but I can understand, given the Sisyphus-like and continuing company specific problems (further exacerbated by COVID)… Remember Warren’s disdain for bad corporate behavior (Salomon?) – well he might simply have had enough with WFC management – that bridge too far might transcend the issue of being a bank.
Lastly, Buffett has recently bought more than $2 billion of Bank of America (BAC) stock since July 20, and now owns roughly 12% of the company.
In summary, Berkshire’s recent disclosures don’t change my bullishness on either bank stocks (for reasons I discussed in my May 20 and July 14 e-mails) or Berkshire Hathaway (see my July 16 and August 12 e-mails).
Former Hertz CEO Gets A Slap On The Wrist
2) In my August 3 e-mail, I wrote about the U.S. Securities and Exchange Commission’s (“SEC”) “totally pathetic” agreement with Bausch Health (BHC), formerly Valeant Pharmaceuticals, and three of its former top executives. I wrote:
In light of the massive, well-orchestrated, multiyear fraud that took place here – resulting in the stock soaring to more than $250 per share and then crashing by 97% to less than $10, costing shareholders nearly $100 billion – the $45 million penalty for the company and mere $700,000 paid by [former CEO Michael] Pearson (the mastermind of the scheme) is a sick joke… especially since the executives didn’t even have to admit wrongdoing! This tap (not even a slap) on the wrist is an open invitation to other fraudsters…
Well, the SEC just did it again, letting former Hertz (HTZ) CEO Mark Frissora off with a slap on the wrist. Back in 2013 (I recall it well because I owned the stock in my hedge fund), Frissora committed accounting fraud and gave guidance to investors that he knew the company wasn’t going to hit, according to the SEC. Yet in the agency’s agreement with Frissora, he doesn’t have to admit anything and only has to repay $2 million in bonuses and a $200,000 civil penalty.
Yet again, a totally inadequate penalty that is open invitation to other fraudsters…
The Psychology of Money
3) I share Wall Street Journal columnist Jason Zweig’s eagerness to read the new book coming out on September 8 by blogger and venture capitalist Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.
Here’s an excerpt from Zweig’s review, Do You Know the Difference Between Being Rich and Being Wealthy?
A New Chapter On Behavioral Finance From ‘The Rise And Fall Of Kase Capital’
4) Speaking of investor psychology, I spent the weekend putting the finishing touches (I hope!) on my forthcoming book, The Rise and Fall of Kase Capital, and added a new chapter on behavioral finance that I want to share with you.
Here’s the first section (I’ll include the rest in subsequent e-mails):
Most human beings are hardwired to be irrational when it comes to financial and investment decisions.
The study of this subject is called behavioral finance, which attempts to explain how and why emotions and cognitive errors influence investors and create stock market anomalies such as bubbles and crashes.
I’ve spent two decades studying this field – and strongly suggest that you do the same. It’s that important. As Buffett once said:
Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
There are many excellent books in this field. Among my favorites are:
- Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger (full disclosure: I was one of the authors)
- Thinking, Fast and Slow, Kahneman
- Influence: The Psychology of Persuasion, Cialdini
- Why Smart People Make Big Money Mistakes and How to Correct Them, Belsky and Gilovich
- Superforecasting: The Art and Science of Prediction, Tetlock and Gardner
- The Winner’s Curse: Paradoxes and Anomalies of Economic Life, Thaler
- Irrational Exuberance, Shiller
- Against the Gods: The Remarkable Story of Risk, Bernstein
In this chapter, I’ll try to capture the most important elements of behavioral finance, but am only going to be able to scratch the surface.
Here are 26 of the most common mental mistakes investors make that I’ve identified:
- Projecting the immediate past into the distant future
- Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient
- Decision and willpower fatigue
- Misunderstanding randomness; seeing patterns that don’t exist
- Commitment and consistency bias
- Fear of change, resulting in a strong bias for the status quo
- “Anchoring” on irrelevant data
- Excessive aversion to loss
- Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money
- Allowing emotional connections to override reason
- Fear of uncertainty
- Embracing certainty (however irrelevant)
- Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
- Becoming paralyzed by information overload
- Failing to act due to an abundance of attractive options
- Fear of making an incorrect decision and feeling stupid (regret aversion)
- Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
- Reluctance to admit mistakes
- After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias)
- Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault
- Failing to accurately assess one’s investment time horizon
- A tendency to seek only information that confirms one’s opinions or decisions
- Failing to recognize the large cumulative impact of small amounts over time
- Forgetting the powerful tendency of regression to the mean
- Confusing familiarity with knowledge
I’d like to touch on a few of these…
Countless studies show how overconfident most humans are (and in light of the type-A personalities drawn to investing, it’s surely worse here):
- 19% of people think they belong to the richest 1% of U.S. households
- 82% of people say they are in the top 30% of safe drivers
- 80% of students think they will finish in the top half of their class
- When asked to make a prediction at the 98% confidence level, people are right only 60%-70% of the time
- 68% of lawyers in civil cases believe that their side will prevail
- 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed
- Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement and how much the average person in the room would have. The average figures were $5 million and $2.6 million, respectively. The professor who asked the question said that, regardless of the audience, the ratio is always approximately 2:1
- 86% of my Harvard Business School classmates say they are better looking than their classmates
Overconfidence can be a good thing – for example, it can help people cope with adversity like losing a job, and can lead to remarkable, breakthrough achievements.
But when it comes to investing, it can be deadly, as it often leads to straying beyond one’s circle of competence, using excessive leverage, overbetting (sizing positions too large), and trading like a maniac. Every one of these things can – and will – blow you sky-high.